V-Shaped Recovery
Candlefocus EditorThe terms “V-shaped” indicates the turning point of the recovery, as the downturn occurs quickly and then suddenly turns back up in a triangle shape, resulting in a V-shape over the course of a graph or chart.
The most common example of a V-shaped recovery happened after the recessions of 1920-21, and 1953 in the United States. Following each recession, the economy bounced back quickly and was at the same, or higher, levels than before the recession in only a few months.
Throughout 2020, the Covid-19 pandemic caused a global recession which sent markets into a tailspin. As countries and economies emerge from the pandemic, economists are predicting a V-shape recovery for the global economy. For example, the International Monetary Fund recently predicted that the global economy would shrink by -4.4% in 2020, but forecast a 5.4% increase in 2021.
Key to a V-shaped economic recovery tends to focus on how quickly the economy can adjust and recover from the shock of a recession. In general, the higher the speed of adjustment, the more V-shaped the recovery will be. Governments, central banks, and streamlining production processes all contribute to a efficiencies in the market and are crucial to a V-shaped recovery.
One way to help promote a swift and efficient recovery is through fiscal and monetary policy. Fiscal policy includes a range of steps governments can take to support the economy, such as cutting taxes or spending more to stimulate demand. Monetary policy seeks to regulate the money supply and interest rates to control inflation and credit expansion.
In the United States, the recently passed Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a series of measures designed to reduce the financial impact of the virus and pave the way for economic recovery. This includes one-time payments up to $1,200 for individuals, additional funds for unemployment insurance, creating new loans for small business and industries hit hard by the pandemic, and providing additional funds for healthcare.
In order for a V-shaped economic recovery to be truly successful, the government and central banks must understand how to efficiently apply fiscal and monetary policies. A V-shaped recovery is essentially the best-case scenario for any recession, but getting to that point requires careful consideration of how to best support the macroeconomic performance of the market.